5 Types of Fraud that Can Ruin Your Business

According to the Association of Certified Fraud Examiners, U.S. businesses will lose an average of 5% of their gross revenue to fraud. Small businesses, which are those with less than 100 employees, are the most likely to be defrauded, with a median loss of $180,000.

If you’re a small business owner, is there any way to stop this? While some types of fraud are difficult to detect, good business practices can prevent you from falling victim. Let’s talk about some of the more common types of fraud that can ruin your business:

1. Tax-Related Scams

Tax-related scams run the gamut, but there are three common schemes to look out for: phishing, return preparer fraud, and phony charities.

1. With phishing, scam artists pretend to be tax agencies in order to steal your information or money. If it’s money they’re after, they’ll call or send an email claiming you owe for supposedly unpaid taxes. The real IRS will always send a bill in the mail before calling and they will never ask for credit/debit card numbers over the phone.
2. Return preparer fraud, which involves a scammer posing as a tax professional, is so common in the U.S. that it’s part of the IRS’s own “Dirty Dozen” list of tax scams. A faux-professional will entice you with a significant refund amount, only to steal your upfront payment, sensitive information and future refund. Ask for an IRS PTIN as well as a copy of your return to ensure you’re not getting ripped off.
3. Donating to a charity is a great way to earn tax benefits, but not every organization is legitimate. Phony charities will aggressively solicit “donations” and ask you for personal information, such as your social security number or passwords, in order to process a payment. The IRS provides a searchable database, EO Select Check, of legitimate charities you can use before making a sizable donation.

2. Payroll Fraud

Payroll fraud affects over 30% of businesses in the United States, causing them to lose millions of dollars in the process. In general, there are a couple types of payroll fraud to look out for: timesheet manipulation and ghost employees.

1. Timesheet manipulation involves employees being paid for hours not worked. A large company may have a hard time tracking every single employee’s schedule, but audits can reveal any anomalies and stop timesheet fraud.
2. A ghost employee is created for the sole purpose of diverting funds. An employee in payroll can create a fake “ghost” employee and collect their paycheck. Like timesheet fraud, ghost employees can be exorcised with regular audits.

3. Double-Billing

From 1997 to 2006, business owner Charlene Corley exploited an automated shipping payment system designed to expedite shipments to the U.S. Defense Department. Corley double-billed many of these supplies, meaning the government paid twice for a single supply. Over the 9-year period, Corley raked in an astounding $20 million before she was caught and charged.

Unfortunately, this sort of fraud can many times go undetected, because the bookkeeper who commits the fraud is usually the only one overseeing the finances, and small amounts of theft over long periods of time don’t typically grab too much attention. Good accounting help can go a long way to prevent double-billing.

4. Over-Ordering

Over-ordering, like double-billing, can easily go undiscovered. Anyone in charge of ordering supplies on behalf of your business, such as an office manager, can order more supplies than needed, without raising concerns. Once enough supplies are siphoned, the office manager can return the supplies in exchange for cash, gift cards, or other products. Multiple employees overseeing your finances is one way to stop this fraud.

5. Friendship Fraud

When you hire someone based solely upon friendship or family, you typically don’t bother with a background check. You trust the person who recommend the hire, so you pay no mind to protocol, but is that really the best idea? Being too trustworthy can have some disastrous results, especially if the person you hire turns out to have a criminal past or not be who they claim. A simple background check can clear all that up.

Get Help Now

Fraud has many forms and they can all be devastating. Our Dallas business litigation lawyers at Lyons & Simmons, LLP can provide the guidance you need to protect your business. Reach out to our attorneys today so we can get started on building a powerful case for you.